Automatic stabilisers tend to stabilise the level of real GDP because:
A) parliament quickly changes spending and tax revenue.
B) federal expenditures and tax revenues change as the level of real GDP changes.
C) the spending and tax multiplier are constant.
D) wages are controlled by the minimum wage law.

Question

Quizplus · Accepted Answer

Automatic stabilisers are built-in features of a government's tax and expenditure policies that help to stabilize fluctuations in real GDP without any deliberate action. The key feature of automatic stabilisers is that they operate automatically in response to changes in the level of real GDP. For example, during periods of economic expansion, tax revenues tend to increase as incomes and profits rise, and government spending on unemployment benefits and other welfare programs tends to decline as fewer people are unemployed. Conversely, during periods of economic contraction, tax revenues tend to decline as incomes and profits fall, and government spending on welfare programs tends to increase as more people become unemployed. This automatic adjustment of tax and spending tends to stabilize the level of real GDP.

Automatic Stabilisers Tend to Stabilise the Level of Real GDP